http://www.morningstar.com/earnings/12406523-new-york-times-co-class-a-nyt-q4-2009.aspx

New York Times Co Class A NYT
Q4 2009 Earnings Call Transcript

Transcript Call Date 02/10/2010

Operator: Good day and welcome to The New York Times Company Fourth Quarter 2009 Earnings Conference Call. Today's call is being recorded. A question-and-answer session will follow today's presentation. (Operator Instructions).

For opening remarks and introduction, I'd like to turn the call over to the Assistant Director of Investor Relations, Ms. Paula Schwartz. Please go ahead, ma'am.

Paula Schwartz - Assistant Director, IR and Online Communications: Thank you, Tanika, and welcome to our fourth quarter and full year 2009 earnings conference call. We have several members of our senior management team here to discuss our results with you. They include, Janet Robinson, President and CEO; Jim Follo, Senior Vice President and Chief Financial Officer; Scott Heekin-Canedy, President and General Manager of The New York Times; and Martin Nisenholtz, Senior Vice President, Digital Operations.

All comparisons on this conference call will be for the fourth quarter of 2009 to the fourth quarter of 2008 unless otherwise stated. Our discussion will include forward-looking statements and our actual results may differ from those predicted. Some of the factors that may cause them to differ are included in our 2008 10-K.

Our presentation will also include non-GAAP financial measures and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our corporate website, at www.nytco.com. An archive of this call will be available on our website as will a transcript and a version that's downloadable to an MP3 player.

With that, let me turn the call over to Janet Robinson.

Janet L. Robinson - President and CEO: Thank you, Paula, and good morning, everyone. We were pleased to see advertisers increase their rate of spending across our newspapers, websites and other platforms as advertising trends improved during the fourth quarter. Our fourth quarter results also reflect the positive impact of the sustained actions we have been aggressively pursuing to reposition our businesses for the evolving future of the media industry.

Principals among those actions are securing strong performance on costs, focusing relentlessly on increasing productivity and efficiency, diversifying our revenue streams, including increasing revenues from our digital sources, introducing an array of new products and innovations, and extending our reach to new audiences, leveraging our brand strength to grow profitable circulation revenue where we believe and have been proven right that continued strong user demand for our high-quality news and information will translate into increased value and managing and rebalancing our asset portfolio to strengthen our core operations and enhance our digital presence.

Looking at the details, our operating profit, excluding depreciation, amortization, severance and special items, grew 11% to $157.6 million in the fourth quarter from $142.1 million in the fourth quarter of 2008. On a GAAP basis, we reported operating profit from continuing operations of $136 million, compared with $63 million in the fourth quarter of 2008.

Diluted earnings per share from continuing operations, excluding severance expense and special items, were $0.44 per share compared with $0.36 in the same period of 2008. On a GAAP basis, we reported diluted EPS from continuing operations of $0.48 compared with $0.19 in the fourth quarter of 2008. Our results included several special items, which Jim will review with you.

We continue to aggressively manage our expenses, as evidenced in a 16% decline in operating costs in the fourth quarter. As a result of these efforts, we achieved approximately $475 million in savings in 2009, which amounts to 17% of our 2008 cost base.

Turning to our balance sheet, which Jim will discuss in greater depth, we made significant progress in reducing our debt last year. Total debt declined by over $290 million to $769 million from approximately $1.1 billion at the end of 2008. These efforts contribute to the improved positioning and financial stability of our Company as we look to the future.

Another one of our strategic focuses is managing and rebalancing our asset portfolio. In the fourth quarter, we completed the sale of WQXR-FM, our New York City classical radio station for gross proceeds of $45 million. The proceeds from this transaction were used to further reduce our outstanding debt. We continue to explore the possible sale of our interest in New England Sports Ventures. The process is complicated and is taking longer than we anticipated.

Last month, we announced that we will be introducing a paid model for NYTimes.com at the beginning of 2011. We have chosen a metered model that will offer users free access to a set of number of articles per month, and then charge users once they exceed that number. Our home delivery subscribers, of course, will continue to enjoy free access online. That's part of the underlying value of the brand.

Taking this metered approach online or non-subscribers will help NYTimes.com develop an additional revenue stream, while preserving its robust advertising business. It will also provide the necessary flexibility to keep an appropriate ratio between free and paid content and enable us to stay connected to a search-driven Web.

This strategy is an important part of our exploration of opportunities across multiple platforms; the Web, mobile devices, e-readers, to fully leverage our content in the digital space. With the metered model, we will remain focused on making NYTimes.com more compelling, interactive and entertaining, providing more reasons for online audiences to visit our site and stay longer. We recognized that our success will be judged by how well we execute this effort and that is why we are waiting until 2011.

We are determined to make subscribing as smooth and easy as possible. We will be working toward integrating our customer management systems, so we can ensure a frictionless and engaging user interface for home delivery subscribers. It will take some time to build, test and deploy the best systems and it will take us time to get this right, but we will.

Now, let me provide you with more detail on our revenues. Total revenues for the Company declined 12%, a significant improvement from the third quarter decline of 17%, with ad revenues down 15%, circulation revenues up 2% and other revenues down 37%. Excluding the operations of City & Suburban, the Company's retail and newsstand distribution subsidiary that was closed in January 2009, total revenues declined 9%, circulation revenues rose 3% and other revenues decreased 12%.

At the News Media Group, which includes The New York Times, New England and Regional Media Groups, ad revenues decreased 17%, mainly due to lower print advertising across the Group. By advertising category, national revenues were down 12%, retail was down 23% and classified was down 27%. Within the classified area, recruitment fell 35%, real estate declined 37% and automotive was down 21%.

The News Media Group's print advertising revenues decreased 20% in the quarter, while online advertising revenues rose 4%, mainly due to growth in display advertising. While the advertising market remains challenging, the rate of decline across the major categories; national, retail and classified, lessened during the fourth quarter. The Group's total advertising revenues, which declined 30% year-over-year in the third quarter, decreased 25% in October, 20% in November and 4% in December.

At the Times Media Group, advertising revenues decreased 14% in the quarter as decreases in print advertising were partially offset by growth in online display advertising. The national print categories where we saw the largest declines were studio entertainment, where the studios released fewer films than last year and provided limited support for new releases and the films released this fall did not match the performance of those in the fourth quarter of 2008, travel, because of lower spending by hotels, tour operators and travel search engines, and corporate, due to reduced spending primarily by energy-related companies.

The national print ad categories where we saw the largest increases were national automotive, led by increased spending by American manufacturers, healthcare, because pharmaceutical companies and hospitals increased their placements, and packaged goods, which saw gains from beverage and food companies. Although classified advertising at the Times Media Group decreased in all three major categories; real estate, recruitment and automotive, the rate of decline moderated as the quarter progressed. Retail advertising revenues decreased due to declines in fashion jewelry, home furnishing store and mass market advertising.

At the New England Media Group, advertising revenues declined 20% in the quarter due to weakness in both print and digital advertising. National ad revenues were down mainly due to lower print advertising, offset in part by growth in online advertising. Decreases in the bank, telecommunications and entertainment categories more than offset gains in the financial services, pharmaceuticals and national automotive categories. Retail advertising revenues were lower, led by softness in sporting goods, jewelry and general merchandise store advertising. Classified advertising at the New England Media Group was soft in all three major areas, but the rate of decline in recruitment and real estate advertising moderated as the quarter progressed.

At the Regional Media Group, advertising revenues decreased 26%, primarily due to weakness in print advertising, particularly in the retail category. The rate of decline in classified recruitment advertising lessened in the quarter, while real estate advertising declines remained flat.

At the News Media Group, circulation revenues grew 2% in the quarter, mainly because of higher subscription and newsstand prices at The Times and The Globe. Excluding C&S, circulation revenues rose 3%. The results from our price increases have been encouraging and confirm that our high quality journalism is valued by our readers.

As newspapers in major metro areas face increasingly difficult economic environments and cut deeply into their editorial resources, The Times has expanded its marketing efforts in many of these places. In the fall, we added local content to The Times coverage, in both print and online, on Friday and Sundays in the San Francisco and Chicago areas. These new pages as well as new city blogs complement the national and global coverage that has made The Times a popular news provider. Our intent is to roll out our expanded reports in several other key markets across the country working with local journalists and news organizations in a collaborative way.

Extending our reach is an important component of our multiplatform strategy. This goal has driven our investments in our online businesses as well as our efforts to grow our audience in print, online, mobile, e-readers, social media and other products. In particular, during the past 18 months, we launched a number of mobile products and apps, and advertisers are making good use of our large mobile audience. In December alone, we had 75 million page views from our mobile sites and apps and we're pleased to report that in December we reached 3 million downloads of our iPhone app since its launch in July of 2008. We continue to embrace innovative new platforms and devices that provide rich experiences for our users.

Moving to the third component of the News Media Group's revenues, other revenues decreased 38%, mainly as a result of the closure of C&S. In the fourth quarter of 2008, C&S and other revenues of approximately $20 million, excluding C&S, other revenues decreased 12%, primarily because of lower revenues from commercial printing. At the same time that our cost and circulation initiatives are yielding positive results, the Times Company remains a leader in capitalizing on the values of our core brands to build premium positions in the new digital and multiplatform media landscape.

NYTimes.com continues to be an innovator in brand advertising, and marketers come to us for our reach, the quality of our audience and our ability to create and execute unique campaigns. As a result, we saw gains in the News Media Group's display advertising during the quarter from new large format display ad units.

In the fourth quarter, digital ad revenues at the News Media Group increased 4%. Healthy growth in display advertising was offset in part by classified advertising declines. After experiencing declines in the first nine months of the year, digital advertising revenues for the Group improved significantly as the quarter progressed with a decrease of 6% in October and increases of 5% in November and 17% in December.

At The About Group, total revenues rose 22% in the quarter to $36.3 million due to higher cost-per-click and display advertising. Growth in advertising revenues, which were up 23%, and strong expense control enabled the Group to increase its operating profit to $18 million from $10 million. The About Group's operating margin expanded to 50% in the fourth quarter, up from 33% in the fourth quarter of last year. Over the past 18 months, About.com has taken a number of steps to improve its sales initiatives, including expanding the professional expertise of its sales team, revamping its marketing strategy and developing new offerings for marketers.

In the fourth quarter, total revenues from our Internet businesses increased 10% to $102 million from $92.5 million in the fourth quarter of 2008. Internet businesses accounted for 15% of the Company's revenues in the fourth quarter versus 12% in the fourth quarter of 2008.

As we continue our transition from a Company that operated primarily in print to one that is increasingly digital in focus and multiplatform in delivery, online advertising revenues are becoming a more important part of our mix. They made up 23% of our ad revenues in the quarter, up from 18% in the same period in 2008.

Looking ahead, visibility remains limited for advertising. In the first quarter of 2010, we expect the rate of decline for print advertising to continue to improve modestly from the fourth quarter of 2009, while digital advertising is expected to perform in line with the fourth quarter level. We will remain focused on realigning our cost base as we continue to reposition our Company for the evolving media marketplace.

Now, let me turn the call over to Jim who will tell you more about our results.

James M. Follo - SVP and CFO: Thank you, Janet. Starting with special items, our fourth quarter results were favorably affected by a $0.22 for a pension curtailment gain resulting from the freezing of benefits under various Company-sponsored qualified and non-qualified pension plans and unfavorably affected by $0.07 for charge for a loss on leases and a fee for the early termination of third-party printing contract and by $0.01 for charge for a write-down of assets due to the reduced scope of a systems project. The lease charge includes a loss on a lease for the office space at The New York Times Media Group as well as an adjustment to the estimated loss on leases recorded in the first quarter associated with the C&S closure.

EPS in the fourth quarter of 2008 had been unfavorably affected by a non-cash charge of $0.07 per share for the write-down of intangible assets at the International Herald Tribune. Severance costs were $0.10 per share in the quarter or $24.6 million compared to $.10 per share or $24.1 million in the same quarter of 2008.

We continued our strong expense discipline in the fourth quarter, building on our multiyear progress to restructure our cost base. Operating costs declined 16% for the quarter as reductions occurred in nearly all major expense categories, including the impact of the closure of C&S and lower newsprint expense.

For the year we achieved approximately $475 million in savings, while continuing to develop innovative products based upon our high-quality journalism. Our cost restructuring efforts have focused on evaluating employee-related costs, implementing strategic plans at The Globe, streamlining operations and increasing efficiencies and closing businesses.

We continued to reduce our headcount across the Company in the fourth quarter. Since wages and benefits are the single largest component of our operational costs, we examined our benefits and staffing levels to uncover greater efficiencies. We will continue to realize significant savings from our reduced number of full time equivalent employees, which declined by 18% in 2009. We also examined our benefits structure and reduced pension benefits for non-union employees and health benefits for retirees. In November 2009, we amended our pension plan for non-union employees to discontinue future accruals and freeze existing accrued benefits effective December 31, 2009.

Concurrently, we froze the supplemental executive retirement plan that provided enhanced retirement benefits to select members of management. At the same time, we increased contributions under the Supplemental Retirement and Investment Plan, our 401(k) plan and introduced two non-qualified supplemental defined contribution plans. We expect those changes to have a positive long-term impact on our cost structure.

As a result of these benefit changes for our non-union employees, in the quarter we recorded a pension curtailment gain of approximately $57 million. This year we expect to see the full year benefit of these and several other actions we took in 2009, including the consolidation of plants and restructured labor agreements at The Globe. We'll carefully manage our cost reduction measures, so that we do not compromise either the quality of our journalism or the smooth functioning of our business operations.

Depreciation and amortization decreased 13% to $31.3 million from $35.9 million in the fourth quarter of 2008, primarily because of lower depreciable assets in 2009. For 2010, we expect depreciation and amortization to be between $125 million and $130 million.

Newsprint expense decreased 48% in the fourth quarter, of which 34% was attributable to lower pricing and 14% to lower consumption. Newsprint prices peaked in the fourth quarter of 2008, decreasing significantly during 2009, until reaching the bottom of the cycle in the third quarter of 2009. Newsprint prices have been rising since September. However, current prices are significantly below the prior year.

Suppliers have announced additional price increases for the first quarter of 2010. Market conditions are currently fragmented with inconsistency among suppliers in implementing announced increases. We believe additional price increases will be difficult for suppliers to achieve unless there is a significant permanent reduction in capacity to bring newsprint supply in balance with demand.

Interest costs in the quarter were $20.9 million from $12.3 million as a result of higher rates on our debt, offset in part by lower average debt outstanding. In 2010, we expect interest expense to be $85 million to $90 million.

During the quarter we reduced debt with the proceeds from the sale of WQXR-FM and paid down $44.5 million in medium term notes that matured in November. Last year, we made significant progress in lowering total debt level through cash flow from operations, divestiture activities and other actions. Our total debt was $769 million at the end of December, down from $1.1 billion at the end of 2008.

At the end of the fourth quarter, there were no outstanding borrowings, excluding letters of credit, under our revolving credit facility compared with $105 million at the end of the third quarter. Because we restructured our debt last year, we lengthened our debt profile, and now the majority of it matures in 2015 or later.

Our effective income tax rate was 38.2% in the fourth quarter and 58.4% for 2009. The higher tax rate for the year was driven by the impact of certain items, including the reduction of deferred tax asset balances, resulting from lower income tax rates on near breakeven results. In 2008, our effective rate was 47.5% for the fourth quarter and 8.3% for the full year.

We have taken decisive steps to reduce capital spending and improve liquidity. Capital expenditures totaled $8 million in the quarter and $45 million for the year, down from $127 million in 2008. This year we project capital spending will be between $40 million and $50 million, since we currently do not expect any significant capital projects for the foreseeable future.

Turning to our pension, our pension assets benefited from strong performance in 2009. For accounting purposes on a GAAP basis, based upon preliminary results, the underfunded status of the Company's qualified pension plans improved approximately $120 million from year-end 2008. For funding purposes on an ERISA basis, the Company previously disclosed a January 1, 2009 underfunded status for its qualified pension plans of approximately $300 million. This funding gap reflected the use of temporary relief allowed by the U.S. Treasury Department.

As of January 1, 2009, without the valuation relief, the Company's underfunded status would have been approximately $535 million. Based upon preliminary results, the Company estimates a January 1, 2010 underfunded status of $420 million. The Company does not have mandatory contributions to its sponsored qualified plans in 2010 due to existing funding credits. However, the Company may choose to make discretionary contributions in 2010 to address a portion of this funding gap.

At this time, the Company expects to make contributions in the range of $60 to $80 million to its sponsored qualified plans, but may adjust this range based on cash flows, pension asset performance, interest rates and other factors. The Company also expects to make contractual contributions of approximately $22 million to $28 million in connection with The New York Times Newspaper Guild pension plan.

In closing, we believe we have taken the right steps to streamline costs, strengthen our balance sheet, realign our portfolio of properties and continue to grow our digital businesses, and are emerging as a stronger organization from this turbulent economic cycle. We recognize that the quality of our journalism is at the heart of our Company's success, but also acknowledge that quality journalism can only survive as part of a profitable business organization.

And with that, we're happy to open up for questions.

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